Do the New FDI Rules Mean the End of Big Fat Online Discounts?

Online giants Amazon and Flipkart have been messing with our local retailers and with elections round the corner how can the government not show concern? They have tightened FDI rules for e-comm. But will this impact customers?

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t has always taken a bit of tugging and pulling to explain the eCommerce business model to a regular person. Intuitively, the idea that bleeding money indefinitely can be a good thing runs somewhat against the grain of sound economic logic. Try convincing a local shopkeeper that it is in his best interest to give you 60 per cent off and 10 per cent cash back and see if he doesn’t chase you out of his establishment with a broomstick priced firmly at MRP. But the model has persisted nonetheless, emboldened by outlier success stories such as Facebook and Amazon (US), and fuelled by investors too giddy with the prospect of unicorns to really care that profits too, might be just as mythical.

For customers, the ride has really been quite fantastic. With companies like Amazon, Flipkart, and Snapdeal practically falling over themselves to woo us (and in the case of Snapdeal, staying very much fallen), the Indian consumer had started taking for granted that any online shopping excursions they made would be richly rewarded.

Recent changes in FDI rules have begun exposing some of the darker aspects of eCommerce retail. We all knew that brick-and-mortar establishments were getting slaughtered by online retail, but no one really cared because discounts have a wonderful way of taking our woes away.

To understand what has happened, we need to step back and realise that neither Amazon nor Flipkart are really retailers. They are online marketplaces, connecting buyers with sellers. When we buy from their sites, we’re not actually buying from them, but from a company that is using their platform to reach us.

Also, neither one is an Indian company. Amazon India is owned by its parent company in the US and Flipkart is now merely the ghost of a Walmart store that wanders aimlessly across the subcontinent asking whether anyone has seen the $16 billion it sunk into a company making no profits.

Amazon’s strategy in this regard has been a case study in capitalist brutality.

While both companies are forbidden by Indian law from selling in India directly, they have, over time, devised ways around this. By investing in the retailer that sells through them, they ensure they have some piece of the action. Amazon’s strategy in this regard has been a case study in capitalist brutality.

Imagine you’re a small retailer who wishes to peddle his wares through Amazon’s platform. You set up your account, slaughter the customary animal that Jeff Bezos demands as an offering, and start your business. Now imagine you have a product that starts selling like hot cakes. A few weeks later, you see that Amazon is selling the same product, only cheaper. They’re selling it through their own retailer, so if you try and call them out, they would probably just knock you off their platform. Even if you stay, chances are you’re paying Amazon a commission of anywhere from 10 to 60 per cent, against the two to three per cent that Amazon’s own retailers pay. At most you can curse Bezos and hope his wife leaves him and takes half his money, but other than that there’s little to do but seethe impotently at the injustice of it all.

Over the years, Amazon has shifted an increasing number of products to its own retailers. So, if you’re wondering why more and more of your orders are being supplied by a company called “Cloudtail” or “Appario”, it’s because they are owned by Amazon and have grown steadily under its muscular wing.

The new FDI rules limit the extent to which a foreign entity can hold a stake in a local retailer to less than 25 per cent. Amazon – either directly or indirectly – was estimated to have about a 42 per cent stake in Cloudtail, meaning that this marketplace Batman was suddenly not allowed to sell via its trusty retail-Robin sidekick.

These rules are not actually new. They have been around for a few years, but the government has just now decided to become stricter in imposing them. With this kind of sudden attention to how large non-Indian companies are messing with our local retailers, one might be tempted to assume there was an election around the corner.

With the imposition of the rule, Amazon found its sales in India plummeting overnight.

With the imposition of the rule, Amazon found its sales in India plummeting overnight. Flipkart, which already complied with this directive, was not affected and continued losing money as per normal. In order to stay legal, Amazon quickly scrambled to sell off any controlling stakes it had in its retailer and brought Cloudtail and Appario back online within a few days. The fact that Amazon was temporarily incapacitated without its predatory pricing lapdogs to offer sub-market prices and crush competition is a telling one. It has long been postulated – without any actual evidence – that when discounts were reduced, clients would still be retained because of loyalty. Amazon’s experience is definite empirical proof that this theory contains little merit. In addition to Amazon having driven smaller vendors to the ground using its own platform against them, they also hold little sway over a consumer market that prides itself on running towards the best possible bargain.

“But what about the customer?” I hear you ask. Is there any point in being materialistic if it doesn’t come with a discount?

The short-term impact on discounts is not likely to be significant. While Paytm’s move to withdraw cashback was certainly an attempt to flirt with profitability, neither Amazon nor Flipkart are trying to make money in the near future. With the deep pockets of their American overlords, they are likely to hold out for a while longer as each attempts to unseat the other and claim dominion over the Indian market. The FDI rules do affect their back-end strategies, but Amazon is already restructuring and remains as eager as ever to channel funds from the pockets of investors into the homes of people determined to let Alexa run their daily lives.

The only impact we might see is that deliveries may not be as smooth for a while. Amazon is working to create an army of small vendors to replicate the model it had with Cloudtail and Appario in way that does not violate the new norms. In doing so, logistics and inventories may need to be re-calibrated, leading to a disruption of services in the medium term.

With eCommerce still being rather young in India, a majority of this story remains, as yet, untold. What we do know is that the model is in no way standardised. With policy changes, competition, and a possible desperation to reach some order of profitability, chances are what we see today will morph considerably over the next few years. In the meantime, as consumers, let’s just enjoy the discounts as long as they last.

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